Online Sales Tax Rule Suspended in Tennessee

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By Che Odom

A Tennessee chancery court ordered the state to suspend enforcement of a new rule requiring out-of-state retailers to begin collecting and remitting sales tax this year until it decides a lawsuit challenging the rule.

Chancellor Russell Perkins signed the order April 10 after it was requested by the plaintiff trade associations and the state Department of Revenue ( Am. Catalog Mailers Ass’n v. Tenn. Dep’t of Revenue , Tenn. Ch. Ct., No. 17-307-IV, order granting injunction 4/10/17 ).

George S. Isaacson, a partner with Brann & Isaacson in Lewiston, Maine, and one of the attorneys representing NetChoice and the American Catalog Mailers Association in the lawsuit, said “I am especially pleased that the Order issued by the Tennessee Chancery Court will protect businesses throughout the country from being forced to contend with the many complex and confusing features of Tennessee tax law.”

The retail groups filed suit March 30 against the DOR after their administrative challenge to the state’s new nexus rule, finalized late last year, was rejected ( Am. Catalog Mailers Ass’n v. Tenn. Dep’t of Revenue , Tenn. Ch. Ct., No. 17-307-IV, complaint filed 3/30/17 ).

The groups say the rule ( Tenn. Code Ann. 1320-05-01-.129(2)) is unconstitutional because it contradicts precedent set by the U.S. Supreme Court’s 1992 ruling in Quill Corp. v North Dakota, 504 U.S. 298, which prohibits states from imposing sales and use tax collection obligations on vendors without an in-state physical presence.

The regulations at issue require remote sellers with at least $500,000 in annual sales to have registered by March 1. Taxes were to be remitted beginning July 1.

Simplification Needed

Isaacson told Bloomberg BNA in an April 11 email that instead of adopting rules that violate the U.S. Constitution, the states, including Tennessee, “should work cooperatively with catalog companies and electronic merchants to reform America’s sales tax system, which currently consists of more than 10,000 different jurisdictions, to make sales tax administration simpler, more uniform, and business friendly. Real tax reform will benefit consumers, state governments, and the health of our national economy.”

The DOR wouldn’t discuss the order, citing the need to preserve taxpayer confidentiality.

Seeking Federal Answer

“In granting this injunction, the Tennessee court matched the reasoning in South Dakota’s court, holding that a bald-faced challenge to 150 years of federal doctrine cannot be enforced until lawsuits are concluded,” Steve DelBianco, executive director of NetChoice, told Bloomberg BNA in an email.

“State lawmakers and regulators might think they can flout the constitution and Supreme Court with impunity, but these court rulings provide a much-needed reality check,” he added.

Hamilton Davison, president and executive director of the American Catalog Mailers Association, called the order an affirmation that “nothing short of an act of Congress or a complete reversal of Quill at the Supreme Court” can force remote sellers to change their business processes.

“To do otherwise forces companies with no physical presence in a given state to spend considerable resources required to comply with a myriad of unconstitutional state regulations or laws,” he told Bloomberg BNA.

As litigation continues, Tennessee’s Legislature also is considering the rules this session as part of omnibus bills (S.B. 53/H.B. 261) that remain in committee. In December 2016, the Joint Operations Committee rejected a motion to give a negative recommendation to the rulemaking.

Challenges Elsewhere

Several states, including Alabama, North Dakota, South Dakota and Wyoming, are using administrative rules and laws to challenge the Supreme Court’s Quill decision.

North Dakota has enacted S.B. 2298, which would require sellers without an in-state physical footprint to collect and remit sales tax if their annual sales in the state exceed $100,000 or amount to 200 or more separate transactions.

The North Dakota law mirrors a South Dakota statute enacted in 2016 that has reached the South Dakota Supreme Court after a lower circuit court ruled the law unconstitutional March 6. South Dakota lawmakers crafted the law, S.B. 106 (codified as S.D. Codified Laws Chapter 10-64), as a vehicle to undo Quill.

Wyoming’s H.B. 19, which Gov. Matt Mead (R) signed March 1, could soon prompt another lawsuit. Given that it also incorporates the $100,000/200 transactions threshold, however, opponents might defer a challenge pending the South Dakota litigation.

To contact the reporter on this story: Che Odom at COdom@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

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